Little New Information Of Significance In SEC Director Ceresney’s FCPA Speech
Yesterday’s post highlighted Assistant Attorney General Leslie Caldwell’s recent speech before a Foreign Corrupt Practices Act audience.
Today’s post provides equal time to Andrew Ceresney’s (Director of the SEC’s Enforcement Division) FCPA speech to the same audience.
To those well-versed on prior SEC FCPA policy speeches, there was little new information of significance in Ceresney’s speech (and you can assess this for yourself by visiting this subject matter tag which highlights every SEC FCPA policy speech in the public domain over the last several years). Indeed, significant portions of Ceresney’s speech were near carbon copies of prior speeches he delivered at the same event one year ago and two years ago (see here and here for prior posts).
[From a LinkedIn comment: “I agree with your assessment of Director Ceresney’s speech. In fact the majority of the attendees who were present during the luncheon speech felt the same way. And judging from his presentation, he was hardly enthused about the speech. Basically, it was just read off paper word for word not even looking up. But you also have to put his speech in the proper context. It was something designed to take up the slack time between the main meal and waiting for the dessert to come out.”]
The only new item in Ceresney’s speech was the following statement: “the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case.”
As a practical matter, this statement is not very significant as the SEC has only used NPAs or DPAs three time since the SEC authorized their use in 2010. Moreover, the SEC has handled voluntary disclosure in the FCPA context in several different ways. In certain instances, civil complaints are filed in connection with voluntary disclosures; in other instances, administrative cease and desist orders are used in connection with voluntary disclosures; and in other instances – as noted by Ceresney – NPAs and DPAs are used in connection with voluntary disclosures.
Prior to excerpting Ceresney’s speech, a few observations about the individual prosecution and BHP Billiton portions of the speech.
Individual Proseuctions
Ceresney stated:
“Outside the FCPA context in particular, over the last five years, 80% of the SEC’s enforcement actions (excluding follow-on administrative proceedings and delinquent filings) have involved charges against individuals. This focus on individuals also applies to FCPA cases.”
Ceresney did not provide statistics for individual prosecutions in connection with corporate SEC enforcement actions so I will. As noted in prior posts here and here, since 2008 83% of SEC corporate FCPA enforcement actions have not resulted in any SEC charges against company employees.
No doubt in recognition of these FCPA specific statistics, Ceresney attempted to articulate why FCPA enforcement actions against individuals “present formidable challenges.” However, most of the factors listed are also present in corporate FCPA enforcement actions. There is however a key difference. In the FCPA’s history, it is not believed that the SEC has ever had to prove a case against an issuer whereas individuals are more likely to, and have, put the SEC’s to burden of proof and the SEC has never satisfied its ultimate burden of proof against an individual when this happens.
BNY Mellon / Anything of Value
Similar to his speech last year at the same event, Ceresney devoted a material portion of his remarks to an FCPA element that is seldom the focus of much discussion: anything of value. In the words of Ceresney “enforcing the FCPA to its fullest extent.”
Ceresney provided a list of questions regarding less tangible things of value that will be of value to compliance practitioners.
In connection with this portion of his speech, Ceresney defended the SEC’s enforcement action against BNY Mellon which focused on the company’s internship practices. He called criticism of the enforcement action “unfounded.”
However, Ceresney failed to address many of the other criticisms of the enforcement action not necessarily connected to the anything of value element such as corrupt intent, obtain or retain business, and other statutory issues. (See here).
The remainder of this post excerpts Ceresney’s speech.
“Pursuing violations of the FCPA remains a critical part of the SEC’s enforcement efforts. The SEC has taken a lead role in combatting corruption worldwide, enforcing the FCPA vigorously against issuers and individuals within its jurisdiction and working with foreign partners to enhance their anticorruption efforts.
The Division of Enforcement – including its specialized FCPA Unit, as well as other members of the staff – continues to be very active holding wrongdoers accountable for FCPA violations. The Commission’s enforcement efforts over the last ten years, along with those of our partners at the DOJ and FBI, have resulted in a sea change in enhancing the focus on FCPA compliance issues.
[…]
I thought I would spend some time this afternoon discussing a few issues that are important to the SEC’s FCPA program: self-reporting and cooperation; holding individuals accountable for FCPA violations; cooperation with foreign regulators; and ongoing efforts to ensure that the FCPA is enforced to its fullest extent.
The Importance of Self-Reporting and Cooperation
I want to start with the importance of self-reporting and cooperation in FCPA cases. The Commission launched its formal cooperation program a little more than five years ago, and as I have explained in other contexts, it has been a great success overall. Even before that formal cooperation program was implemented, the SEC was rewarding cooperation in FCPA matters, and it has continued to do so under the more formal program. In the last fiscal year alone, the Commission gave significant credit for cooperation in more than half a dozen cases. These included the settlement with Layne Christensen, which included a significantly reduced penalty of 10% of the disgorgement amount; a settlement with PBSJ, where we entered into a deferred prosecution agreement and the penalty was a small fraction of disgorgement; and a settlement with Goodyear, which was the first case where the Commission agreed not seek any penalty in recognition of the company’s significant cooperation. These cases should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits. Companies should understand that the benefits of cooperating with the SEC are significant and tangible.
Let me spend a moment on self-reporting because that is an issue that has attracted lots of attention in recent years. Self-reporting is critical to the success of SEC’s cooperation program. Self-reporting allows the Enforcement staff to discover misconduct more quickly and reliably than otherwise would be possible. In certain cases, particularly when misconduct occurs overseas, companies may be in a better position to quickly investigate misconduct and the information provided by companies as part of their self-reporting often gives a significant head start on our investigations.
Self-reporting also is a valuable tool for parties who want to maximize the benefits available for cooperation. As the cases I just mentioned make clear, there are significant benefits available to companies who self-report violations and cooperate fully with our investigations. Benefits range from reduced charges and penalties, to deferred prosecution or non-prosecution agreements – known as DPAs or NPAs – in instances of outstanding cooperation, or in certain instances when the violations are minimal, no charges.
However, beyond these benefits, which are the carrot, there is also a stick that should further incentivize self-reporting. Companies that make a decision not to self-report misconduct take the chance that the Enforcement Division will learn of this misconduct through other means. The SEC’s whistleblower program has created real incentives for people to report wrongdoing to us. If the Enforcement Division finds the violations through its own investigation or from a whistleblower, the consequences to the company will likely be worse and the opportunity to earn additional cooperation credit may well be lost. As I’ve said before, when discussing our cooperation program in general and specifically in the FCPA context, companies are gambling if they fail to self-report FCPA misconduct to us.
Given the importance of self-reporting to our FCPA investigations, the Enforcement Division continues to looks for ways to encourage self-reporting of violations through our cooperation program. Towards that end, the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case. I am hopeful that this condition on the decision to recommend a DPA or NPA will further incentivize firms to promptly report FCPA misconduct to the SEC and further emphasize the benefits that come with self-reporting and cooperation.
It is important to note here that while the Division will require a company to self-report in order to be eligible for a DPA or NPA, self-reporting alone is not enough. Determinations of how much credit to give an entity for cooperation, including whether to take the extraordinary step of entering into a DPA or NPA, are made by evaluating the broad factors set out by the Commission in the Seaboard report. In addition to self-reporting, these factors include a corporation’s self-policing, remediation, and cooperation. While DPAs and NPAs are valuable tools, they reflect a significant level of cooperation and have been a relatively limited part of Commission enforcement practice. I think this is appropriate and should continue to be the case. But the Division will not even consider this step if a company fails to self-report.
Requiring a company to self-report potential FCPA violations in order to be eligible for a DPA or NPA is consistent with the SEC’s practice since the introduction of our formal cooperation program in 2010. In each FCPA case where the SEC entered into a DPA or NPA, the company involved self-reported the violations, and then provided significant cooperation throughout the investigation.
The most recent example is the DPA the Commission entered into with PBSJ Corporation earlier this year. In that case, the Commission charged a former officer of the Florida engineering and construction firm with violating the FCPA by offering and authorizing bribes and employment to foreign officials to secure Qatari government contracts. The Commission determined that a DPA with the company was appropriate. PBSJ self-reported the violations to the SEC, took immediate steps to end the misconduct, and fully cooperated with the investigation, including voluntarily making foreign witnesses available for interviews and providing factual chronologies, timelines, internal summaries, and full forensic images to the SEC. Under the DPA, PBSJ agreed to pay more than $3 million in disgorgement and prejudgment interest and a penalty of $375,000 – approximately 10% of the disgorgement level – and to comply with certain undertakings.
Similarly, in 2013 the Commission entered into its first ever FCPA NPA with Ralph Lauren Corporation in connection with bribes paid by a subsidiary to government officials in Argentina. In determining to enter a NPA with the company, the Commission recognized the company’s prompt self-reporting of the violation – within two weeks of discovering the illegal payments – and its extraordinary cooperation with the SEC’s investigation, which included voluntarily and expeditiously producing relevant documents, providing translations of foreign-language documents, providing witness interview summaries from its internal investigation, making overseas witnesses available, and bringing witnesses to the U.S. The Commission also took into account significant remedial measures undertaken by Ralph Lauren. Under the NPA, the company paid more than $700,000 in disgorgement and pre-judgment interest.
Finally, self-reporting was a key consideration leading to the DPA with Tenaris, S.A., in 2011, which was the SEC’s first DPA since the introduction of the cooperation program. The agreement with Tenaris involved allegations that the global manufacturer of steel pipe products made almost $5 million on contracts obtained through bribes of Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas. The Commission determined that a DPA with Tenaris was appropriate. The company immediately reported the violations to the SEC, conducted a thorough internal investigation, fully cooperated with the investigation, and implemented significant remediation efforts. Under the DPA, Tenaris paid $5.4 million in disgorgement and prejudgment interest and agreed to enhance its compliance practices. Tenaris paid no penalty.
I hope that by highlighting the benefits of cooperation and detailing the efforts companies took to self-report and cooperate, the Enforcement Division can help provide a blueprint for companies regarding what kind of cooperation and remediation efforts are required to maximize the benefits of the SEC’s cooperation program.
Focus on Individual Liability
The next area I want to talk about today is our focus on individual liability. Holding individuals accountable for their wrongdoing is critical to effective deterrence and, therefore, the Division considers individual liability in every case. Outside the FCPA context in particular, over the last five years, 80% of the SEC’s enforcement actions (excluding follow-on administrative proceedings and delinquent filings) have involved charges against individuals. This focus on individuals also applies to FCPA cases. When we are able to recommend a case against individuals for FCPA violations, we do so.
However, it is also true that FCPA cases often present formidable challenges to establishing individual liability. In most FCPA cases, the individuals most directly involved in the wrongdoing are foreign nationals who live outside the United States. As a result, it is often difficult to establish personal jurisdiction over potential wrongdoers, particularly if they are employees of the foreign subsidiary rather than the parent issuer. In addition, most of the witnesses and documents are located overseas, which presents evidentiary challenges. The cases are very time-consuming and resource-intensive to litigate, and if the wrongdoer is a foreign national with no assets or ties to the U.S., recoveries may be limited. Finally, given the evidentiary challenges and complexity of FCPA investigations, the statute of limitations also complicates these cases. The statute of limitations applicable to Commission actions is not tolled when foreign evidence requests are outstanding.
However, where the Division’s investigations find sufficient evidence to bring charges and establish personal jurisdiction, the Commission brings those cases. Over twenty percent of the SEC’s FCPA cases this past year were brought against individuals, sometimes in conjunction with a case against the issuer, and sometimes before or after the issuer case was brought. In the PBSJ case I discussed earlier, while the Commission entered into a DPA with the company, it charged the former PBSJ officer who orchestrated the scheme with violating the anti-bribery provisions of the FCPA. As set out in the SEC’s order, the officer offered to funnel funds to a local company owned and controlled by a foreign official in order to secure two multi-million Qatari government contracts for PBSJ and also offered employment to a second foreign official in return for assistance as the bribery scheme began to unravel. The officer agreed to settle the charges and pay a significant penalty.
In August, the Commission brought charges against a former executive at a worldwide software manufacturer for violating the FCPA by bribing Panamanian government officials through an intermediary to procure software license sales. As set out in the SEC’s order, the executive orchestrated a scheme to pay bribes to one government official and promised to pay two others in order to obtain four contracts to sell software to the Panamanian government. The executive, who lives in Miami, agreed to settle the charges and disgorge all of his ill-gotten gains.
And earlier this fiscal year, the SEC charged two former employees in the Dubai office of a U.S.-based defense contractor with violating the FCPA by providing government officials in Saudi Arabia with improper benefits to help secure business for the company. The individual employees settled the charges and each agreed to pay a significant penalty.
The Commission is committed to holding individuals accountable and I expect you will continue to see more FCPA cases against individuals.
Effective Coordination with International Regulators and Law Enforcement
One of the reasons we’ve been able to achieve such success in our FCPA cases over the past few years – both against companies and individuals – is the Division’s effective coordination with international regulators and law enforcement. In today’s globalized marketplace, the SEC’s ability to protect investors and maintain fair and efficient markets is often dependent on Enforcement’s ability to investigate misconduct that takes place, at least in part, abroad. This is especially true with FCPA investigations, which routinely rely on evidence obtained from foreign jurisdictions, and often are conducted in parallel with foreign governments.
Over the past five years, the Enforcement Division has experienced a transformation in the ability to get meaningful and timely assistance from international partners. Enforcement has greatly expanded its efforts to obtain evidence of potential wrongdoing from around the globe with the assistance of the SEC’s Office of International Affairs and continues to strengthen our partnerships with other countries. There has also been an important trend of significant growth in focus and legislation on corruption issues worldwide over the last few years. The result has been a tremendous increase in cooperation from other governments and better access to evidence in foreign countries.
This increased coordination helps the SEC successfully conclude significant enforcement actions. For example, assistance from foreign authorities was critical to the Commission’s recent case against Hitachi. The investigation was greatly assisted by the African Development Bank and the South African Financial Services Board. And the resulting case charged Hitachi with violating the FCPA by inaccurately recording improper payments to a front company for the African National Congress – the ruling party in South Africa – in connection with contracts to build two power plants. The company agreed to settle the charges and pay a $19 million penalty for its FCPA violations.
In April of this year, the SEC also charged FLIR Systems, Inc. for violating the FCPA by financing what an employee termed a “world tour” of personal travel for government officials in the Middle East who played key roles in decisions to purchase products from FLIR. The Commission’s order found that FLIR earned more than $7 million in profits from sales influenced by the improper travel and gifts. We received valuable assistance in our investigation from the United Arab Emirates Securities and Commodities Authority. To settle the matter, FLIR agreed to pay more than $9.5 million in disgorgement and penalties and report its FCPA compliance efforts to the agency for the next two years. In the BHP Billiton matter I mentioned earlier, the Division received assistance from the Australian Federal Police.
These are just three recent examples of the Division’s success in working with the international community to receive documents and other types of foreign assistance. I fully expect the pace and extent of foreign agencies’ cooperation in the FCPA space to grow over the coming years as the Division continues to forge new relationships abroad and strengthen those we already have.
Enforcing the FCPA Statute to its Fullest Extent
Finally, I thought I would say a few words about the Commission’s efforts to enforce the FCPA to the fullest extent of the statute. As this audience surely knows, the statute precludes the payment or provision of “anything of value” to a foreign official in order to induce that official to take official action or obtain an improper advantage for the purpose of obtaining or retaining business.
And of course “anything” of value is, on its face, a broad term. Obviously, cash payments count. Similarly, tangible gifts to foreign officials undoubtedly qualify as things of value. But the Commission has also successfully brought FCPA cases where other, less traditional, items of value have been given in order to influence foreign officials. For example, last year, I discussed a series of cases in which the Commission brought bribery charges against companies that made contributions to charities that were affiliated with foreign government officials, provided no-show jobs to the spouse of a foreign official, or paid for the honeymoon of a foreign official’s daughter, all to induce those officials to direct business to the companies. Each of these benefits qualifies as something of value under the FCPA statute.
The SEC’s recent case against BNY Mellon, its first FCPA case against a financial institution, also illustrates this approach. The Commission’s case charged that the firm violated the FCPA by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.
Some have expressed concern about these cases, arguing that it is difficult to draw a clear line between what constitutes a violation and what does not, in cases involving less traditional items of value. In my view, these concerns are unfounded. The line between what is acceptable and what constitutes a violation of the law is in the same place it always has been: when something of value – which can include a gift, donation, favor, or hiring decision – is given or taken with intent to influence the foreign official in his or her official actions or obtain an improper advantage. While this analysis is dependent on the facts and circumstances of each particular case, it is the same analysis companies routinely conduct when considering how their employees interact with government officials in the course of business. The relevant questions include:
- Was the gift, donation, favor, or hiring asked for by the foreign official?
- Did the company official believe that the gift, donation, favor, or hiring would advance their business interests and help them obtain particular business, or at least obtain an improper advantage with the foreign official?
- Was the gift, donation, favor, or hiring consistent with company policy and practice?
- Were the company’s normal procedures followed in connection with the gift, donation, favor, or hiring?
- Would the gift, donation, favor, or hiring have been made if there were no potential business benefit?
In the BNY Mellon case for example, the Commission’s order described the following facts. The sovereign wealth fund officials explicitly and repeatedly requested the internships and the BNY Mellon employees viewed providing the internships as important to keeping the sovereign wealth fund’s business and potentially obtaining new business. Indeed, one BNY Mellon employee stated that failure to provide the internships would “potentially jeopardize our mandate” with the sovereign fund and another stated that providing the internship was “the only way” to increase BNY Mellon’s share of business from the sovereign funds’ European office. In addition, the bank did not evaluate or hire the officials’ relatives through its internship program, which had stringent standards, including a minimum grade point average, relevant prior work experience, and multiple rounds of interviews. In fact, the family members hired did not meet the basic entrance standards for any established BNY Mellon internship program, did not have the requisite academic or professional credentials, and were not even required to interview before being offered the positions.
Under these circumstances, I would suggest that there was ample basis for viewing the internships as something of value to the foreign officials who requested them for their relatives, and for concluding that they were given in an attempt to influence the foreign officials in connection with the performance of their official duties or to obtain an improper advantage from the foreign officials.
As I’ve said before, bribes come in many shapes and sizes. And in my view, the FCPA is properly read to cover providing valuable favors to a foreign official, as well as providing cash, tangible gifts, travel or entertainment.
Conclusion
To sum up, the Enforcement Division is committed to aggressively pursuing violations of the FCPA by entities and individuals. We will continue to use our cooperation program and to coordinate with international regulators and law enforcement to do so more effectively. It is my hope that we can continue to build on the solid foundation we have created for FCPA compliance in the coming years.”
Next Up – Bristol-Myers
First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).
Then it was Smith & Nephew (see here – $22 million enforcement action in February 2012).
Then it was Biomet (see here – $22.8 million enforcement action in March 2012).
Then it was Pfizer / Wyeth (see here – $60 million enforcement action in August 2012).
Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).
Then it was Stryker (see here – $13.2 million enforcement action in October 2013).
Then it was Mead Johnson (see here – $12 million enforcement action in July 2015).
The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Bristol-Myers Squibb Co. (“BMS”).
Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”
Yesterday, the SEC announced this administrative cease and desist order in which BMS agreed, without admitting or denying the SEC’s findings, to pay approximately $14.7 million.
The order states in summary fashion as follows.
“These proceedings arise out of violations of the internal controls and recordkeeping provisions of the FCPA by BMS and its majority-owned joint venture in China. Between 2009 and 2014, BMS failed to design and maintain effective internal controls relating to interactions with health care providers (“HCPs”) at state-owned and state-controlled hospitals in China. Through various mechanisms during this period, certain sales representatives of the joint venture improperly generated funds that were used to provide corrupt inducements to HCPs in the form of cash payments, gifts, meals, travel, entertainment, and sponsorships for conferences and meetings in order to secure new sales and increase existing sales. BMS falsely recorded the relevant transactions as legitimate business expenses in its books and records.”
The findings focus on Bristol-Myers Squibb (China) Investment Co. Limited (“BMS China), a company through which BMS conducts business in China, and how BMS China, in turn, primarily operates in China through Sino-American Shanghai Squibb Pharmaceuticals Limited (“SASS”), a majority-owned joint venture.
According to the Order:
“BMS holds a 60% equity interest in SASS and has held operational control over this entity since 2009 when it obtained the right to name the President of SASS and a majority of the members of SASS’s Board of Directors.
BMS began operating in China in 1982 when it formed SASS, the first SinoAmerican pharmaceutical joint venture. Following a successful product launch in 2005, BMS China’s business grew quickly. By 2009, BMS China had 1490 full-time employees and net sales of more than $200 million. This upward trend continued through 2014 when the number of full-time employees expanded to 2464 and net sales reached nearly $500 million.
Certain BMS China employees achieved their sales, in part, by providing HCPs and other government officials with cash and other inducements in exchange for prescriptions and drug listings.”
Under the heading “Failure to Respond to Red Flags,” the Order states:
“BMS China failed to respond effectively to red flags indicating that sales personnel provided improper payments and other benefits in order to generate sales from HCPs. In 2009, BMS China initiated a review of travel and entertainment expenses submitted for reimbursement by its sales personnel and found non-compliant claims, fake and altered invoices and receipts, and consecutively numbered receipts. Shortly thereafter, BMS China retained a local accounting firm to conduct monthly post-payment reviews of all claims for travel, entertainment, and meeting expenses to identify false, improperly documented, and unsubstantiated claims. BMS China brought this function in-house in early 2011 and the results of both the external and internal reviews were provided to management of BMS China as well as regional compliance and corporate business managers who reported directly to senior management of BMS.
During the period between mid-2009 and late 2013, BMS China identified numerous irregularities in travel and entertainment and event documentation, including fake and altered purchase orders, invoices, agendas, and attendance sheets for meetings with HCPs that likely had not occurred. BMS China inaccurately recorded the reimbursement of these false claims as legitimate business expenses in its books and records, which were then consolidated into the books and records of BMS.
Certain BMS China employees admitted that they had submitted false reimbursement claims and used the funds for the benefit of HCPs in support of sales by BMS China. They also alleged that the use of false reimbursement claims to fund payments to and for the benefit of HCPs in order to secure prescription sales was a widespread practice at BMS China. In emails to the BMS China President in November 2010 and January 2011, certain terminated employees wrote that they used the funds to pay rebates, provide entertainment, and fund gift cards for HCPs, as there was no other way to meet their sales targets. Citing the “open secret” that HCPs in China rely upon the “gray income” to maintain their livelihood, they said that they tried to meet the demands of the HCPs for the benefit of BMS China. Despite the widespread exceptions and serious allegations of potentially widespread bribery practices, BMS China did not investigate these claims.”
Under the heading “Compliance and Controls Environment,” the Order states:
“Despite its longstanding presence in China, BMS did not implement a formal FCPA compliance program until April 2006 when it adopted its first standalone anti-bribery policy and corresponding corporative directive. At approximately the same time, BMS began conducting compliance assessments and audits of BMS China that included a review of internal controls relating to anti-bribery risks. These internal reviews revealed weaknesses in the monitoring of payments made to HCPs, the lack of formal processes around the selection and compensation of HCPs as speakers, deficiencies in obtaining and documenting the approval of donations, sponsorships, and consulting arrangements with HCPs, and the failure to conduct post-event verification of meetings and conferences sponsored by sales representatives. Reports of these findings were provided to senior management of BMS China as well as members of BMS’s global compliance department.
These identified controls deficiencies were not timely remediated and compliance resources were minimal. The corporate compliance officer responsible for the Asia-Pacific region through 2012 was based in the U.S. and rarely traveled to China. There was no dedicated compliance officer for BMS China until 2008, and no permanent compliance position in China until 2010. In addition, the BMS sales force in China received limited training and much of it was inaccessible to a large number of sales representatives who worked in remote locations. For example, when BMS rolled out mandatory anti-bribery training in late 2009, 67% of employees in China failed to complete the training by the due date.
Annual internal audits of BMS China repeatedly identified substantial gaps in internal controls, and the results were reported to the Audit Committee and senior management of BMS. In connection with each audit, the audit team cited a lack of effective controls and documentation relating to interactions with HCPs and the monitoring of potential inappropriate payments to HCPs. Among Internal Audit’s conclusions were that BMS China’s controls around the review and approval of travel and entertainment expenses and gifts to HCPs were not effective and that it failed to track payments to HCPs, including high-risk payments, in its quarterly review of potential inappropriate payments, and to enforce controls relating to the documentation, approval, and payment of distributor rebates. Internal Audit also cited the lack of due diligence assessments of distributor compliance, including anti-bribery compliance, the failure to properly document and approve agreements with HCPs who served as speakers, and the lack of a mechanism to ensure that services were received in exchange for sponsorships. As a result, Internal Audit issued a series of qualified opinions in connection with its annual audits of BMS China between 2009 and 2013.”
Under the heading “Internal Documents Reveal Improper Benefits Provided to HCPs,” the Order states:
“Emails and other BMS China documents detail, among other things, proposed “activity plans,” “action plans,” and plans for “investments” in HCPs to increase prescription sales. These contemporaneous documents were prepared at the direction of, and sometimes transmitted to, district and regional sales managers of BMS China, and show that sales representatives used funds derived from travel and expense claims to make cash payments to HCPs and to provide gifts, meals, entertainment, and travel to HCPs in order to induce them to prescribe products sold and marketed by BMS China. The sales representatives provided a variety of benefits to HCPs, ranging from small food and personal care items to shopping cards, jewelry, sightseeing, and cash payments, in exchange for prescription sales. This kind of conduct was captured in a July 2013 email from a sales representative to a regional manager. The sales representative explained that a former sales representative had offered cash for sales to HCPs at a local hospital and “the attitude of the director of the infectious diseases department was extremely clear when I took over: ‘No money, no prescription.’” Similarly, the work plans prepared by other sales representatives also identified correlations between the value of the benefits provided to specific HCPs and the volume of prescription sales expected.
Certain documents within BMS China were replete with references to “investments” made in order to obtain sales, such as offering speaking engagements and sponsorships for domestic and international conferences and meetings in exchange for prescriptions. Some sales representatives also sought to increase prescription sales and maintain drug listings at pharmacies by hosting cash promotions and events for pharmacy employees. Based on the volume of prescriptions, certain BMS China sales representatives gave cash, shopping cards, and foodstuffs as promotional prizes to pharmacy employees; at least one sales representative characterized the expenses as a “departmental development fee” in contemporaneous documents.”
Based on the above, the Order finds:
“As described herein, BMS, through the actions of certain BMS China employees, violated [the FCPA’s books and records provisions] by falsely recording, as advertising and promotional expenses, cash payments and expenses for gifts, meals, travel, entertainment, speaker fees, and sponsorships for conferences and meetings provided to foreign officials, such as HCPs at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies in China, to secure prescription sales. BMS also violated [the FCPA’s internal controls provisions] by failing to devise and maintain a system of internal accounting controls relating to payments and benefits provided by sales representatives at BMS China to these foreign officials. As identified in various internal reviews, audits, and investigations conducted since at least 2009, BMS lacked effective internal controls sufficient to provide reasonable assurances that funds advanced and reimbursed to employees of BMS China were used for appropriate and authorized purposes.”
Under the heading “Remedial Efforts,” the Order states:
“BMS has implemented significant measures to enhance its anti-bribery and general compliance training and policies and to strengthen its accounting and monitoring controls relating to interactions with HCPs, including travel and entertainment expenses, meetings, sponsorships, grants, and donations funded by BMS China. BMS took numerous steps to improve the internal controls and compliance program at BMS China. Examples include a 100% pre-reimbursement review of all expense claims; the implementation of an accounting system designed to track each expense claim, including the request, approval, and payment of each claim; and the retention of a third-party vendor to conduct surprise checks at events sponsored by sales representatives. Additionally, BMS terminated over ninety employees, and disciplined an additional ninety employees, including sales representatives and managers of BMS China, who failed to comply with or sufficiently supervise compliance with relevant policies. In addition, BMS replaced certain BMS China officers as part of an overall effort to enhance “tone at the top” and a culture of compliance. Further, BMS revised the compensation structure for BMS China employees by reducing the portion of incentive-based compensation for sales and distribution, eliminated gifts to HCPs, implemented enhanced due diligence procedures for third-party agents, implemented monitoring systems for speaker fees and third-party events, and incorporated risk assessments based on data analytics into its compliance program.”
As stated in the Order:
“Without admitting or denying the findings, Bristol-Myers Squibb consented to the order and agreed to return $11.4 million of profits plus prejudgment interest of $500,000 and pay a civil penalty of $2.75 million. Bristol-Myers Squibb also agreed to report to the SEC for a two-year period on the status of its remediation and implementation of FCPA and anti-corruption compliance measures.”
In the SEC’s release Kara Krockmeyer (Chief of the SEC’s FCPA Unit stated):
“Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years.”
Yesterday Bristol-Myers’s stock closed down .47%.
According to reports, Bristol-Myers was represented by F. Joseph Warin of Gibson Dunn.
Development From The “Other Universe” – In Dismissing FCPA-Related Securities Fraud Claims, Judge Repudiates FCPA Enforcement Theory
Foreign Corrupt Practices Act issues often co-exist in two parallel universes.
One universe is ruled by all-powerful gods with big and sharp sticks in which subjects dare challenge the gods.
Another universe consists of checks and balances in which independent actors call the balls and strikes.
The first universe refers to FCPA enforcement by the DOJ and SEC.
The second universe refers to litigation of FCPA-related claims in which judges make decisions in the context of an adversarial legal system. This second universe is often referred to as the rule of law universe.
There are several examples of theories used in the first universe that do not work in the second universe.
For instance, the FCPA enforcement agencies frequently take a seeming “if / then” position when it comes to issuer internal controls. In other words, if some misconduct occurred somewhere within an issuer’s business organization or if some employee within that organization circumvented the issuer’s internal controls, then the issuer did not have effective internal controls.
However, when this simplistic theory is used in civil litigation, courts have routinely concluded that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient. (See e.g., Midwest Teamsters Pension v. Baker Hughes, 2009 WL 6799492 (S.D. Tex. 2009); Freuler v. Parker Drilling 803 F.Supp.2d 630 (S.D. Tex. 2011).
This post concerns the most recent example regarding the parallel universes.
As readers likely know, a recent development in the first universe was the SEC’s enforcement theory in the BNY Mellon (“internship”) enforcement action (see here and here for prior posts) that bribery includes “things of value” provided indirectly to “foreign officials” if the thing of value is subjectively valued by the foreign official.
In the words of the SEC in BNY Mellon, ““The internships [for family members of alleged “foreign officials”] were valuable work experience[s], and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”
Yet, in the other universe a federal court judge recently stated as follows.
“[The FCPA’s anti-bribery provision] does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials.” (emphasis added).
Those words were written by U.S. District Court Judge Melinda Harmon (S.D. Tex.) in dismissing securities fraud claims brought against Hyperdynamics Corporation in the aftermath of its FCPA scrutiny. (See here for the opinion).
Before discussing the ruling, a bit of background.
It is often as predictable as the sun rising in the east.
When a company is the subject of FCPA scrutiny or resolves an FCPA enforcement action, plaintiff lawyers representing shareholders will emerge like bats from a cave bringing derivative actions and/or securities fraud actions against the company as well as officers and directors. To learn more about this dynamic, see “Foreign Corrupt Practices Act Ripples.”
For instance, in September 2013 Hyperdynamics Corp. disclosed that it was the subject of FCPA scrutiny (see here for the prior post). On the day of the disclosure, the company’s stock fell approximately 15%. As sure as the sun rises in the east, a few days later, not one but two, plaintiffs firms issued releases (here and here) announcing an “investigation” and civil actions soon followed alleging Section 10(b) and Rule 10b-5 claims based on general risk disclosures in SEC filings referring to corruption.
As stated by Judge Harmon (certain internal citations omitted):
“Defendants issued twenty statements disclosing a risk of FCPA violations before they disclosed the FCPA subpoenas. (“We operate in Guinea, a country where corrupt behavior exists that could impair our ability to do business in the future or result in significant fines or penalties.”). Seven of the statements further revealed Hyperdynamics had found “control deficiencies” in its accounting practices in 2009. (“Some of the identified internal control deficiencies contributing to our material weaknesses in financial reporting relate to our operations in Guinea. These material weaknesses make it more likely that [an FCPA] violation could have occurred.”). The control deficiencies are not identified in the record. Defendants state: “Hyperdynamics had historically had some difficulties—mainly during the period before the management and board were largely replaced beginning around 2009— maintaining adequate internal controls.” Four of the statements specifically deny violations of the FCPA. (“Neither the Company, nor any of its Subsidiaries, nor, to the Knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries, has, in the course of its actions for, or on behalf of, the Company, violated or is in violation of any provision of the [FCPA].”).
Defendants do not contend the statements above were adequate disclosures of FCPA related risks. Defendants tentatively argue: “Plaintiff never meaningfully addresses the Company’s risk disclosure language, including its disclosure beginning in 2009 that certain internal control weaknesses ‘make it more likely that a[n] [FCPA] violation could have occurred.’” Defendants maintain FCPA violations did not occur.
Plaintiffs respond that the disclosures were false or misleading by omission, because violations occurred. Plaintiffs have not, however, established that FCPA violations occurred. The only authoritative evidence in the record that FCPA violations occurred is Hyperdynamics’s disclosure of subpoena requests by the DOJ in September 2013 and the SEC in January 2014. On March 12, 2014, Hyperdynamics’s partner Tullow Guinea Limited declared these subpoenas a force majeure event but retracted the declaration in May 2014. These disclosures do not establish that FCPA violations occurred or that Defendants knowingly omitted FCPA violations. See Konkol v. Diebold, Inc., 590 F.3d 390, 402 (6th Cir. 2009) (“The mere existence of an SEC investigation does not suggest that any of the allegedly false statements were actually false . . . [,] nor does it add an inference of scienter.” (quoting In re Hutchinson Tech., Inc. Secs. Litig., 536 F.3d 952, 962 (8th Cir. 2008))). Defendants cannot be held liable for not preempting the SEC process and issuing a public confession. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014) (rejecting argument that “in addition to disclosing the existence of an investigation, defendants were required to disclose that [defendant] UBS was, in fact, engaged in an ongoing tax evasion scheme,” because “disclosure is not a rite of confession”).”
Judge Harmon next stated and concluded (certain internal citations omitted):
“Plaintiffs have not alleged FCPA-related facts which would render either the sixteen risk disclosures or the four specific denials misleading by omission and which Defendants had a duty to disclose. Furthermore, Plaintiffs have failed to allege facts which would render the specific denials false or misleading.
The FCPA prohibits a company from making an “offer, gift, promise to give, or authorization of the giving of anything of value” to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity” in obtaining business. This prohibition does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials. Nor does it prohibit misappropriation by a foreign official without the company’s knowledge.
Here, Plaintiffs have alleged Defendants made donations to the government of Guinea during three phases of negotiations over Hyperdynamics’s concession. Plaintiffs claim these donations constituted bribery under the FCPA. The first donation occurred after Hyperdynamics received a letter in 2005 indicating the government had cancelled its concession. Defendants met with the Secretary General of Guinea at the Presidential Palace and were told the letter was a “fake” but that further review was necessary. On August 1, 2006, Defendant CEO Kent Watts founded a nonprofit organization called American Friends of Guinea for the purpose of making charitable contributions “for the welfare of the Guinean population.” Shortly thereafter, on September 22, 2006, the government approved the first renegotiated concession.
The second instance of alleged bribery occurred during negotiations from late 2007 to 2009, after the renegotiated concession became a local news story and the government again threatened to cancel it. In September 2007, a delegation led by the Secretary General visited Hyperdynamics’s office in Houston, and vice versa. Over the next year, American Friends of Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who were stricken with cholera and quarantined as a result thereof. AFG also planned new water well projects to get to the source of solving the problem.” In addition, Plaintiffs cite an investor forum, www.investorvillage.com, which cites an article from a Guinean news website, www.guinee24.com, stating the Minister Secretary General “disbursed by means of [H]yperdynamics, the sum of five hundred (500) million Guinean francs, which were distributed to some of Ioubards [hooligans] Municipality of Kaloum and other districts in the capital of Guinea. Ioubards [were seen] in the streets two days before the fateful day of the strike of January 10, 2008. . . .” Plaintiffs allege the “hooligans” supported the President and organized street protests against the Prime Minister. On February 8, 2008, according to a Wikileaks cable,Hyperdynamics CFO Briers met with the U.S. Embassy. The cable states, “Briers raised the issue of FCPA violations” by the Company during the meeting, and did so “without prompting.” Briers denied the Company paid the 500 million Guinea francs to the reported hooligans. Briers also denied Hyperdynamics had paid the Secretary General “to push through their contract.” Plaintiffs argue, “Despite Briers’ denials of specific instances of alleged bribery, his voluntary whistleblowing of FCPA violations further reinforced the Embassy’s view that Hyperdynamics was violating the act.” The cable explains the Embassy declined Brier’s request for assistance in negotiating with the government on grounds that “commercial advocacy would be very difficult, if not impossible, due to the fact that the [U.S. Government] does not recognize the military junta as a legitimate government.” According to another Wikileaks cable, Tidiane Diallo, a new employee of the Ministry of Mines who formerly worked at USAID told the Embassy, “I am sure Hyperdynamics was the minister’s ticket for his appointment.” According to the cable, Diallo based his statement on the fact that “the minister was appointed on August 27 . . . and that Hyperdynamics was at the ministry the very next day. The company’s contract was reinstated a few days later.” Diallo also claimed Hyperdynamics had offered to donate $56 million to the government to pay its annual bill for power plant fuel. The cable states: Diallo reportedly warned the minister of mines to reject the offer, pointing out that it is not clear what Hyperdynamics wants in return, and accepting a “donation” at this point would undermine the [government’s] future bargaining power. He said that the [government] has not yet decided whether or not to accept the funds, but that the ministers of mines and finance may decide to do so because of significant budgetary pressures. The embassy officer asked Diallo directly if the donation was a bribe, and Diallo responded, “yes and no.” Diallo explained, “[O]n the one hand, the offer is public and no one is trying to negotiate a deal behind closed doors. At the same time, the fact that the [government] does not know what Hyperdynamics wants in return raises questions about the company’s intent.” Again, Defendants’ negotiations bore fruit. On September 11, 2009, a Memorandum of Understanding was signed, partially affirming and modifying Hyperdynamics’s concession. On September 29, 2009, Hyperdynamics made a donation to American Friends of Guinea of stock. On the same day, a director of Hyperdynamics resigned, following the firing of the CEO and resignation of the CFO and another director during the summer of 2009. The concession was approved by presidential decree in May 2010.
The third instance of alleged bribery occurred in 2011, after the concession was again disputed by the transitional government and modified by way of a mining code promulgated in September 2011. Plaintiffs cite testimony from confidential witness CW-1, a former Logistics Operations Manager for Hyperdynamics, alleging Hyperdynamics donated and installed $20,000 of computer equipment for the Ministry of Mines in 2011 and $8,000 to $10,000 of computer equipment for the Guinean Offshore Department of Environment, “an agency that the Company helped to create from scratch.” Plaintiffs do not specify any particular official action influenced by the computer donations. Plaintiffs also fail to plead donations to the government and the American Friends of Guinea constituted gifts to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity.”
In sum, Plaintiffs’ FCPA-related fraud claims are based on speculations of uncharged, unadjudicated FCPA violations that are not plausibly material.”
Issues To Consider From The BNY Mellon Enforcement Action
This recent post highlighted and offered initial commentary on the SEC’s FCPA enforcement action against BNY Mellon. This post continues the analysis by highlighting other issues to consider.
First Ever
FCPA practitioners would likely be hard pressed to imagine an enforcement action that includes alleged violations of the FCPA’s anti-bribery provisions and internal controls provisions, without alleged violations of the books and records provisions
There would be good reason for the struggle – it has never happened before – until earlier this week.
The BNY Mellon enforcement action is believed to be the first-ever SEC FCPA enforcement action not to include allegations or findings regarding books and records violations. A future post will explore this issue in more detail.
A Step Further Than Schering-Plough and Eli Lilly
The FCPA’s anti-bribery provisions expressly state, in pertinent part, that money, a gift, or anything of value must be given to, offered to, or promised to: (1) a foreign official; (2) a foreign political party of official or candidate for foreign political office; or (3) any person “while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office …”.
Regardless of the prong, as evident from the statutory text, the thing of value must ultimately be intended for a “foreign official.”
Previously in the Schering-Plough and Eli Lilly enforcement actions the SEC alleged that the companies violated the FCPA by making charitable contributions to a bona fide Polish charity dedicated to restoring historical cases. However, as alleged by the SEC, the charity was a pet project of an alleged Polish official with discretionary authority over the purchase of pharmaceuticals.
While perhaps a distinction without a difference, the charges/findings in both cases as to the above conduct were limited to the FCPA’s books and records and internal control provisions.
Even so, the enforcement theory was clear: in analyzing “anything of value” the enforcement agencies will put themselves in the shoes of the alleged “foreign official” and ask how the recipient perceived the thing of value and whether the recipient subjectively valued the thing of value.
The BNY Mellon enforcement action goes a step further than Schering-Plough and Eli Lilly by finding violations of the FCPA’s anti-bribery provisions. The key language from the SEC is the following: “The internships were valuable work experience, and the requesting officials derived significant personal value in being able to confer this benefit on their family members.” (emphasis added).
Notable Findings
Notwithstanding the SEC’s findings that the Interns did not meet BNY’s Mellon’s supposed “rigorous criteria” for hiring and were not evaluated and hired through the company’s “established internship programs,” the following SEC findings are notable.
One of the Interns (Intern C) was not paid.
As to the other two interns, the SEC’s order states: “because Interns A and B had already graduated from college” BNY paid the interns “above the normal salary scale for BNY Mellon undergraduate interns but below the scale for postgraduate interns.”
In other words, the SEC found that BNY Mellon violated the FCPA’s anti-bribery provisions, not necessarily because of the compensation offered to the Interns, but rather the SEC’s belief that the Interns should never have been interns at BNY Mellon in the first place and because of this – again in the words of the SEC – the alleged “foreign officials” “derived significant personal value in being able to confer this benefit on their family members.”
Time Line
According to BNY Mellon’s disclosures: “in January 2011, the Enforcement Division of the U.S. Securities and Exchange Commission (the “SEC Staff”) informed several financial institutions, including BNY Mellon, that it had commenced an inquiry into certain of their business practices and relationships with sovereign wealth fund clients.”
Thus, BNY Mellon was under FCPA scrutiny for approximately 4.5 years.
BNY Mellon Becomes The First – Of What Is Expected To Be Several Financial Services Companies – To Pony Up Millions Based On Its Internship Practices
Congress never intended the Foreign Corrupt Practices Act to be an all-purpose corporate ethics statute. But with increasing frequency, this is what the DOJ and SEC have converted the FCPA into based on enforcement theories that are rarely subject to judicial scrutiny.
Previously there have been FCPA enforcement actions that included allegations of improper hiring of spouses or children of alleged “foreign officials” (see here for a prior post), but until yesterday there has not been, it is believed, an enforcement action based exclusively on such a theory.
The financial industry has been under intense FCPA scrutiny the past two years (see here for a prior post) concerning its alleged hiring and internship practices. This scrutiny has generated a significant amount of critical commentary. For instance, in this Wall Street Journal editorial former SEC Commissioner Arthur Levitt called the FCPA scrutiny of the financial industry “scurrilous and hypocritical.” He wrote:
“If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.”
Yesterday this scrutiny yielded the first – of what is expected to be many in coming months – enforcement action.
It was against BNY Mellon Corp. (see here for the SEC’s press release) and the action was based on findings the company provided “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.”
Internships of course have been provided to relatives of customers so long as their have been internships. For the U.S. government to now equate this with corrupt intent and bribery is questionable. But then again, FCPA enforcement is not necessarily about the law, but more a game of the SEC using its leverage against risk averse corporations to extract settlement amounts.
Without admitting or denying the SEC’s findings, and based on an enforcement theory not subjected to any judicial scrutiny, BNY Mellon ponied up $14.8 million dollars rather than engage its principal government regulator in litigation.
The SEC’s administrative cease and desist order states in summary fashion:
“This matter concerns violations of the anti-bribery and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by BNY Mellon. The violations took place during 2010 and 2011, when employees of BNY Mellon sought to corruptly influence foreign officials in order to retain and win business managing and servicing the assets of a Middle Eastern sovereign wealth fund.
These officials sought, and BNY Mellon agreed to provide, valuable internships for their family members. BNY Mellon provided the internships without following its standard hiring procedures for interns, and the interns were not qualified for BNY Mellon’s existing internship programs.
BNY Mellon failed to devise and maintain a system of internal accounting controls around its hiring practices sufficient to provide reasonable assurances that its employees were not bribing foreign officials in contravention of company policy.”
Under the heading “BNY Mellon’s Business with the Middle Eastern Sovereign Wealth Fund” the order states:
“During the relevant time period, BNY Mellon’s business in the EMEA region collected fees for services provided to the Middle Eastern Sovereign Wealth Fund. [The Middle Eastern Sovereign Wealth Fund is described as follows. “[A] government body responsible for management and administration of assets of a Middle Eastern country, as entrusted to it by that country’s Minister of Finance. The Middle Eastern Sovereign Wealth Fund is wholly owned by that country and was created to perform the function of generating revenue for it. The Minister of Finance serves as Chairman of the Middle Eastern Sovereign Wealth Fund’s Board of Directors and its most senior members are political appointees. The Middle Eastern Sovereign Wealth Fund generally hires external managers to make day-to-day investment decisions concerning its assets.”] Those fees arose from government contracts awarded to BNY Mellon through a process requiring approval from certain foreign government officials, and also from additional assets allocated to BNY Mellon under existing contracts at the discretion of certain foreign government officials.
The Middle Eastern Sovereign Wealth Fund first became a client of BNYM Asset Servicing in 2000, when the European Office [The European Office is described as follows: “[T]he Middle Eastern Sovereign Wealth Fund’s office in Europe. The European Office is responsible for managing a portion of the assets entrusted to the Middle Eastern Sovereign Wealth Fund. Unlike the Middle Eastern Sovereign Wealth Fund, its parent, the European Office generally uses its own inhouse investment professionals to actively manage assets for which it is responsible.”] awarded to BNY Mellon custody of certain assets. Since then, BNY Mellon has earned regular fees for the safekeeping and administration of Middle Eastern Sovereign Wealth Fund assets. According to the terms of the custody agreement, these fees are subject to increase from time to time as the European Office allocates additional assets to BNY Mellon. While the total amount of Middle Eastern Sovereign Wealth Fund assets under custody by BNY Mellon has varied over time, during the relevant time period BNY Mellon held Middle Eastern Sovereign Wealth Fund assets totaling approximately $55 billion.
BNY Mellon entered an additional agreement with the European Office in 2003 permitting BNYM Asset Servicing to loan out certain of the Middle Eastern Sovereign Wealth Fund assets under custody within set guidelines, which varied over time.
This securities lending arrangement significantly increased BNY Mellon’s revenues from its dealings with the Middle Eastern Sovereign Wealth Fund. In 2010 and 2011, BNYM Asset Servicing repeatedly sought to modify the lending guidelines, which had been significantly restricted following the 2008 economic crash, in order to bring the guidelines back to pre- 2008 levels and further grow the securities lending business with the Middle Eastern Sovereign Wealth Fund. During the relevant time period, BNYM Asset Servicing sought to increase the amount of assets under custody from the European Office.
In 2009, the Middle Eastern Sovereign Wealth Fund became a client of BNYM Asset Management when the fund entered into an investment management agreement designating the Boutique [described as a wholly owned asset management firm operating within BNYM Asset Management] to manage assets worth approximately $711 million (the “Boutique mandate”). The bulk of the assets under the investment management agreement were funded in November 2009, with an additional portion transferring to BNY Mellon in June 2010. Official X [described as a senior official with the Middle Eastern Sovereign Wealth Fund during the relevant time period] was BNYM Asset Management’s principal point of contact in connection with the Boutique mandate. According to the terms of the agreement, the amount of assets under management was subject to change, as the Middle Eastern Sovereign Wealth Fund could allocate additional assets to the Boutique mandate at any time. In June 2010, the Middle Eastern Sovereign Wealth Fund transferred an additional $689,000 to BNY Mellon under the Boutique mandate. During the relevant time period, BNY Mellon sought to increase the amount of its Middle Eastern Sovereign Wealth Fund assets under management.”
Under the heading “The Internships” the order states:
“Officials X and Y [described as was a senior official at the European Office during the relevant time period] requested that BNY Mellon provide their family members with valuable internships. Officials X and Y made numerous follow-up requests about the status, timing and other details of the internships for their relatives after the internships had been offered, and delivering the internships as requested was seen by certain relevant BNY Mellon employees as a way to influence the officials’ decisions.
In February 2010, at the conclusion of a business meeting, Official X made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A [described as a recent college graduate], and nephew, Intern B [also described as a recent college graduate]. As a Middle Eastern Sovereign Wealth Fund department head, Official X had authority over allocations of new assets to existing managers such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY Mellon employees concerning the status of his internship request, asking whether and when BNY Mellon would deliver the internships. At one point, Official X said to his primary contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and that the official could secure internships for his family members from a competitor of BNY Mellon if it did not satisfy his personal request. The same BNY Mellon employee later wrote to a BNY Mellon colleague that Official X had become “angry” because BNY Mellon was experiencing delays in delivering the internships, and had openly questioned the employee’s job performance and professionalism because of the delays.
As reflected in contemporaneous e-mails and other documents, BNY Mellon delivered the valuable internship sought by Official X in order to assist BNY Mellon in obtaining or retaining business. For example:
A Boutique account manager wrote in a February 2010 e-mail concerning the internship request for Interns A and B that BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign Wealth Fund].”
In June 2010, an employee of BNY Mellon with primary responsibility for the Asset Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of the internships for Interns A and B: “I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”
In a separate e-mail to a different BNY Mellon colleague, the same employee stated “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).”
The same employee advised a colleague in human resources: “[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want [the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending e-mail correspondence concerning Official X’s internship request “because it was a personal favor.”
After granting Official X’s request to hire Interns A and B, BNY Mellon retained the Boutique mandate, and further assets were transferred to BNY Mellon by Official X’s department within a few months.
In February 2010, around the same time that Official X made his initial internship request, Official Y asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C [also described as a recent college graduate]. As a senior official at the European Office, Official Y had authority to make decisions directly impacting BNY Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this regard, stating that Official Y was “crucial to both retaining and gaining new business” for BNY Mellon. One or more European Office employees acting on Official Y’s behalf later inquired repeatedly about the status and details of the internship, including during discussions of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial request, a number of recent client service issues had threatened to weaken the relationship between BNY Mellon and the European Office.
The BNY Mellon employee with primary responsibility for managing the custody relationship with the European Office viewed Official Y’s request as important to assist BNYM Asset Servicing in obtaining or retaining business. For example:
The BNY Mellon custody relationship manager explained to more senior officers within BNY Mellon that granting Official Y’s request was likely to “influence any future decisions taken within [the Middle Eastern Sovereign Wealth Fund].”
The same BNY Mellon relationship manager expressed to colleagues his concern that one of BNY Mellon’s competitors would agree to hire Intern C if BNY Mellon would not, and that BNY Mellon might lose market share to the competitor as a result.
The relationship manager wrote: “Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”
The relationship manager separately wrote that meeting Official Y’s requests was the “only way” to increase BNY Mellon’s share of business from the European Office, aside from obtaining assets in new countries.
After granting Official Y’s request to hire his son, Intern C, BNY Mellon retained its existing custody and securities lending business from the European Office, which continued to grow.
During the relevant time period, BNY Mellon had an established summer internship program for undergraduates as well as a separate summer program for postgraduates actively pursuing a Master of Business Administration (MBA) or similar degree. Admission to the BNY Mellon postgraduate internship program was highly competitive and characterized by stringent hiring standards. To recruit postgraduates, BNY Mellon had relationships with a small number of the most highly selective schools in the United States and the United Kingdom from which it sourced candidates. Successful applicants had to achieve a minimum grade point average, and had to advance through multiple rounds of interviews in addition to having relevant prior work experience and a demonstrated affinity for and interest in financial services work. BNY Mellon also placed an emphasis on relevant leadership experience.
The Interns did not meet these rigorous criteria and BNY Mellon did not evaluate or hire the Interns through its established internship programs. For example, as recent graduates not enrolled in any degree program, the Interns did not meet the basic entrance standard for a BNY Mellon postgraduate internship. Further, contrary to BNY Mellon’s goal of converting student interns to full-time hires, the Interns were to return to the Middle East at the conclusion of their internship and BNY Mellon had no plan to hire them as full-time employees. Nor did the individual Interns have the requisite academic or professional credentials for its existing internship programs.
Though they did not meet the criteria of BNY Mellon’s existing internship programs, BNY Mellon hired Interns A, B and C. Contrary to its standard practice, BNY Mellon decided to hire the Interns before even meeting or interviewing them. Indeed, the special “work experiences” sought by Officials X and Y were not regular undergraduate or graduate summer internships at all, but customized one-of-a-kind training programs. The internships were valuable work experience, and the requesting officials derived significant personal value in being able to confer this benefit on their family members. As requested by Officials X and Y, BNY Mellon designed customized work experiences for the Interns. These bespoke internships were rotational in nature, meaning that Interns A, B and C had the opportunity to work in a number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns. Interns A and B were placed in Boston, Massachusetts and were employed by BNY Mellon from August 6, 2010 through February 25, 2011. Intern C was onboarded and placed in London, England and interned with BNY Mellon from July 4, 2010 through December 17, 2010. These approximately six-month internships were significantly longer than the work experiences typically afforded to BNY Mellon interns through the normal summer internship program.
The internships were neither inexpensive nor easy for BNY Mellon to structure. BNY Mellon determined, because Interns A and B had already graduated from college, that Interns A and B should be paid above the normal salary scale for BNY Mellon undergraduate interns but below the scale for postgraduate interns. Intern C was unpaid. BNY Mellon also coordinated obtaining visas for all three of the Interns so that they could travel from the Middle East to work in the countries in which they were placed. BNY Mellon paid the legal fees and filing costs related to the visas. As the BNY Mellon Asset Management employee responsible for arranging two of the three internships wrote in a contemporaneous e-mail, the internships constituted an “expensive favor” for the requesting foreign official.
BNY Mellon hired all three of the Interns, with the knowledge and approval of senior BNY Mellon employees:
According to the BNY Mellon Asset Management employee with primary responsibility for arranging the internships for Interns A and B, he had initially struggled to deliver the internships as requested by Official X until the internships had the “blessing” of a senior BNY Mellon employee, after which “it started to move.” The senior employee facilitated the internships by contacting human resources on behalf of the Interns, forwarding their resumes and stating that he “would like us to support.”
The BNY Mellon relationship manager with lead responsibility for arranging the internship for Intern C sent an e-mail to two senior BNYM Asset Servicing officers describing Official Y’s request and seeking their “support” for the internship. The same relationship manager later wrote to BNY Mellon colleagues seeking assistance in arranging the internship and stating “[p]lease know that this request has the backing of both [senior officers].”
In October 2010, Official Y made a further request that BNY Mellon modify the custom internship it had created for Intern C so that he could rotate through an additional BNY Mellon business unit. This request was also granted with the knowledge and approval of senior BNY Mellon employees.
The Interns were less than exemplary employees. On at least one occasion, Interns A and B were confronted by a BNY Mellon human resources employee concerning their repeated absences from work. A Boutique portfolio manager who worked with Intern C observed that his performance was “okay” and that “he wasn’t actually as hardworking as I would have hoped.” Despite these issues, BNY Mellon accommodated the Interns in order to favorably influence Officials X and Y.
Under the heading “BNY Mellon’s FCPA-Related Policies, Training and Internal Controls” the order states:
During the relevant time period, BNY Mellon had a code of conduct, as well as a specific FCPA policy, which prohibited BNY Mellon employees from violating the statute. While BNY Mellon’s policies stated that “any money . . . gift . . . or anything of value” provided to a foreign official might constitute a bribe, employees were provided with little additional guidance that was tailored to the types of risks related to hiring faced by BNY Mellon’s international asset servicing unit and asset management business division.
During the relevant time period, BNY Mellon provided training on employees’ obligations under the FCPA and BNY Mellon’s policies, but did not ensure that all employees took the training or understood BNY Mellon’s policies.
During the relevant time period, BNY Mellon had few specific controls relating to the hiring of customers and relatives of customers, including foreign government officials. Sales staff and client relationship managers were permitted wide discretion in making initial hiring decisions and human resources was not trained to flag hires that were potentially problematic. Senior managers were able to approve hires requested by foreign officials with no mechanism to ensure that potential hiring violations were reviewed by anyone with a legal or compliance background. BNY Mellon’s system of internal accounting controls was insufficiently tailored to the corruption risks inherent in the hiring of client referrals, and therefore inadequate to fully effectuate BNY Mellon’s policy against bribery of foreign officials.”
Based on the above, the order finds:
“BNY Mellon violated [the FCPA’s anti-bribery provisions] by corruptly providing valuable internships to relatives of foreign officials from the Middle Eastern Sovereign Wealth Fund in order to assist BNY Mellon in retaining and obtaining business. BNY Mellon also violated [the FCPA’s internal controls provisions], by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its employees were not bribing foreign officials.”
Under the heading “Commission Consideration of BNY Mellon’s Cooperation and Remedial Efforts” the order states:
“In determining to accept the Offer, the Commission considered cooperation BNY Mellon afforded to the Commission staff and the remedial acts undertaken by BNY Mellon. Prior to the investigation by the Commission of the Interns, BNY Mellon had begun a process of enhancing its anti-corruption compliance program including: making changes to the Anti-Corruption Policy to explicitly address the hiring of government officials’ relatives; requiring that every application for a full-time hire or an internship be routed through a centralized HR application process; enhancing its Code of Conduct to require that every year each employee certifies that he or she is not responsible for hiring through a non-centralized channel; and requiring as part of a centralized application process that each applicant indicate whether she or a close personal associate is or has recently been a government official, and, if so, additional review by BNY Mellon’s anti-corruption office is mandated.”
In the SEC’s press release, Andrew Ceresney (Director of the SEC Enforcement Division) stated:
“The FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.”
Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”
As noted in the release:
“Without admitting or denying the findings, the company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.”
Yesterday BNY Mellon’s share price closed up .7%.
Jay Holtmeier (Wilmer Cutler Pickering Hale and Dorr) represented the company.